The ‘Google tax’

With the introduction of the so-called ‘equalisation levy’ on payments made to overseas providers of online advertising services in the Union Budget for 2016-17, India has managed to bag two birds with one stone. One, the move has sent a clear signal to the rest of the world that it will not be a zero tax economy in any sphere of economic activity. And two, it has incentivised major players in India’s digital economy — most of them do not, for tax purposes, have a ‘permanent establishment’ in India — to set up shop formally in India. One way or the other, overseas players, who currently dominate India’s explosively growing digital economy, will become a part of the revenue stream of the government, and so contribute their fair share to the nation’s development. With a government-appointed panel, whose report was made public by the Finance Ministry on Monday, suggesting that such an ‘equalisation levy’ be extended to payments made to overseas providers of a host of other online services — from designing, hosting and maintaining websites to cloud storage and cloud-based software usage and downloads to all forms of e-commerce activity — India has become an early mover in the global war by revenue authorities against ‘base erosion and profit shifting’ (BEPS), or tax avoidance strategies used by multinational companies using loopholes in the existing system.

While the equalisation levy is one of the options suggested by the Organisation for Economic Cooperation and Development’s (OECD) report on tackling BEPS, OECD itself is still working on developing a consensus on how such a levy should actually be imposed. By not making it a part of the Income Tax Act, India has side-stepped potential disputes and litigations under various double taxation avoidance treaties. But this also means that the tax paid will not be given input credit by any other tax authority, even though India has said other nations are free to do this if they wish to do so. This means most overseas service providers will shift the onus of the tax on to Indian customers paying for such services. This has cost implications for India’s nascent startup ecosystem.

There are also the long term implications for India’s own IT services firms, which rely mostly on overseas markets. If other nations follow India’s lead and impose similar taxes on services provided from India, local IT firms’ cost advantage could be significantly eroded, rendering them non competitive. The levy could also act as a potential deterrent for overseas service providers looking to expand their offerings in India, which might have a dampening effect on the ‘Digital India’ initiative. With a global consensus on tax treaties also in the works — which would have made the imposition of such a levy on the digital economy a simpler affair by allowing automatic amendment of all existing tax treaties — it might have been more prudent to wait a while longer.

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